LIC's proposed stake buyout in HDFC Bank 'well-timed', has limited downside

Credit Suisse AT1 bond fallout hits India’s most valuable bank

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After a week of heavy selloff, HDFC Bank shares gained two percent to touch Rs 1,462 per share on January 29 on the back of Reserve Bank of India's (RBI's) nod to Life Insurance Corporation's (LIC's) request of additional stake buyout. RBI allowed LIC to buy up to a 9.99 percent stake in the private sector lender from its current hold of 5.2 percent. This will be sentimentally positive for the stock and any downside from here on would be limited, said analysts.

"We expect HDFC Bank stock to recover current losses and jump back by 15 percent in the next one year," said Chokkalingam G, Founder at Equinomics Research. He said that the bank is increasing its focus on rural and semi-urban areas and this will prove to be the next growth levers.

Shares of HDFC Bank tumbled 14 percent after the lender's Q3 financials came below Street estimates. Factors like fall in earnings per share (EPS), margin strain and sluggish deposit growth contributed to the negative sentiment around the stock. As a result, Bank Nifty, wherein it carries a 40 percent weightage also declined by over a percent.

ALSO READ: HDFC Bank stock gains 2% after LIC gets RBI nod to buy 4.8% additional stake

LIC's additional stake buyout in HDFC Bank is a 'value-buy', say experts

Market experts believe that LIC's proposed additional stake buyout of 4.8 percent comes at a time when the lender's stock valuation turned attractive post its steep fall. They believe that the buyout would be gradual in process, spread over a one-year time frame and not an immediate one-time acquisition.

"LIC will start buying its approved additional stake in HDFC Bank in a slow manner. Since HDFC Bank's valuations have turned attractive from historical averages, it is most likely expected that LIC will complete the rest of its acquisition," said VK Vijayakumar, Chief Market Strategist at Geojit Financial Services.

Currently, HDFC Bank stock trades at 2.4-2.5 times (x) price-to-book (PB) value as against historical averages of 4xPB value, said analysts.

The RBI has advised LIC to complete its approved shareholding in HDFC Bank within a period of one year, that is by January 24, 2025. LIC’s current stake at HDFC Bank is valued at nearly Rs 50,000 crore. So another round of Rs 50,000 crore fresh buyout will be done gradually, added Chokkalingam G of Equinomics Research.

Kaitav Shah, lead BFSI analyst at Anand Rathi Institutional Equities sees LIC's additional stake approval in HDFC Bank as a 'value buy.' He believes that LIC's support will bode well for the stock that saw merger challenges this quarter.

"Though we expect merger pangs to persist for the next couple of quarters, the bank may come out as winner once it balances its margin and growth pain. We will take another year to assess the bank's profitability due to its recent merger, hence, sharing a 'hold' call," he told CNBC-TV18.

ALSO READ: Daily Voice | This market strategist says downside risk to HDFC Bank limited

LIC's shareholding in HDFC Bank vs other private peers

Historically, LIC has been increasing its stake in HDFC Bank over the last few quarters. The insurance giant grew its stake to 5.19 percent in December 2023 from 4.12 percent in December 2022. (see chart)

Apart from HDFC Bank, LIC also has stake in other private peers like ICICI Bank (6.9 percent), Kotak Mahindra Bank (6.2 percent), and Axis Bank (8.2 percent), showed data.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.